The Mistake Almost All Traders Make
The reason most traders fail to interpret candlesticks correctly is quite simple: they overcomplicate things. When I started trading, I had a relatively small account and felt I couldn't afford losses. I couldn't afford to make mistakes. With my back against the wall, I was constantly looking for something to hedge against risk.
And what did I do? I started adding indicator after indicator, hoping that the more tools I had, the safer I'd be. I confess I'm a little embarrassed to show you what my chart looked like at the time: there were over twenty different indicators layered together, so much so that the candles were barely visible. It was absolute chaos.
The Myth of the Holy Grail and the Reality of Numbers
I've been searching for what many call the "Holy Grail" : that perfect indicator that always tells you when to buy, exactly when to sell, and that never loses you money. That would be fantastic, no doubt about it. But I have some bad news for you: it doesn't exist. There's no infallible indicator out there, and there's no trader who doesn't suffer losses from time to time.
What gave me hope when I was just starting out was knowing that there were traders out there who were consistently making money. Professional traders who had proven they could generate significant profits despite being right "only" 68% of the time. In other words, they were wrong 32% of their trades, yet they still made money. And this is possible thanks to a good risk/reward ratio, decent accuracy, and choosing the right instruments to trade.
Fewer Indicators, More Results: The Optimal Setup
After years of trial and error, I've come to a fundamental conclusion: fewer indicators are better . But which ones should you use? I'll tell you exactly which indicators you should consider, and why.
Exponential Moving Averages (EMA)
I use three exponential moving averages: the 9-EMA , the 20-EMA , and the 200-EMA . Why exponential and not simple? Because EMAs give more weight to recent prices, making them more responsive to current price movements. And why these three periods in particular?
9-Map (Gray): This is the fastest moving average. It calculates the average price of the last 9 periods and moves rapidly with the price. Ideal for identifying short-term movements and entry points.
EMA 20 (blue): Moves a little slower than the 9. It represents the short-medium term trend and often acts as dynamic support during pullbacks in an uptrend.
200 EMA (magenta): The long-term moving average most respected by institutional traders. It represents the market's primary trend. When the price is above the 200 line, the general sentiment is bullish; when it is below, it is bearish.
Some might ask, "Why don't you also use the 50 or 100 EMA?" The answer is simple: I find them to be additional indicators that I don't actively use. Anything I don't use makes my chart more confusing, and that's exactly what I want to avoid. I like the 9 EMA slightly better than the 10 because it's slightly faster and gives me slightly earlier signals.
The VWAP: The Break-Even Point
The second fundamental indicator is VWAP , which stands for Volume Weighted Average Price. I visualize it as a dashed orange line on the chart.
The VWAP is similar to a moving average, but with one crucial difference: it also takes into account the volume traded at each price level. This makes it a much more accurate indicator of the "true" average price of a security throughout the day. Simply put, the VWAP represents the breakeven point of the trading day.
When the price is above the VWAP , it means the current price is above the day's weighted average. Buyers are in control, and sentiment is bullish.
When the price is below the VWAP , it means the current price is below average. Sellers dominate the market, and sentiment is bearish.
VWAP is used by both retail and institutional traders as a benchmark. Large funds use it to evaluate the quality of their execution: if they can buy below the VWAP or sell above it, they have obtained a better price than the market average.
Anatomy of a Japanese Candle
Before delving into specific patterns, it's essential to understand the basic anatomy of a Japanese candlestick. Each candlestick contains four essential pieces of information: the opening price, the closing price, the high, and the low for the period.
The body of the candle represents the difference between the open and the close. In a bullish candle (green or hollow), the close is higher than the open; in a bearish candle (red or solid), the close is lower than the open.
The shadows (or "wicks") represent the extremes reached during the period. The upper shadow shows how far buyers pushed the price up before sellers pushed them back. The lower shadow shows how far sellers pushed the price down before buyers responded.
Each candlestick tells a story. A large body indicates strong momentum in the direction of the candlestick. A small body suggests indecision. Long upper shadows indicate that sellers have repelled upward attempts. Long lower shadows indicate that buyers have defended certain price levels.
The Concept of Timeframe and Coherence
A key aspect of candlestick analysis is consistency across timeframes. Personally, I primarily trade on 1-minute and 5-minute charts for day trading, but I always monitor higher timeframes to get the bigger picture.
Here's a key principle: If the price oscillates between the 9 EMA and the 20 EMA on the 1-minute chart, but remains steadily above the 9 EMA on the 5-minute chart, the uptrend is still intact. Higher timeframes always take precedence when interpreting the overall direction.
| Timeframe | Main Use | EMA Recommended |
|---|---|---|
| 1-5 minutes | Scalping, Day Trading | EMA 9, 20, VWAP |
| 15-60 minutes | Day Trading, Swing Trading | EMA 9, 20, 50 |
| Daily | Swing Trading, Position Trading | EMA 20, 50, 200 |
| Weekly | Trend Analysis, Investing | EMA 50, 200 |
The Clean Setup: What Your Chart Should Look Like
Mentally compare a chart with 20+ indicators overlaid with one that simply has three moving averages and the VWAP. The difference is comparable to that between a cluttered, chaotic room and a clean, organized space. When your chart is clean, your mind is free to focus on what really matters: price action and candlestick structure.
In the next article in the series, we'll delve into the most reliable candlestick patterns. We'll analyze the Hammer, the Doji, the Shooting Star, and the Engulfing patterns, with real statistics on success rates derived from studies of over 56,000 trades. We'll also explore the concept of the "first candle to make a new high" and how to use it to identify optimal entry points.
